A monthly commentary for investors and their advisors about how the quirks of human behavior

drive investing...and what you can do about it

The Misbehaving Investor

As the average holding period of a stock plummets, so have the time horizons of many investors - from the smallest to the (very) largest.

Investors that lack patience can find that risks can arise from their more rapid trading, as this month's issue discusses.

John Heldman, CFA

President

Dave Hutchison, CFA

Managing Director

About Us

Triad Investment Management manages equity and balanced portfolios with a focus on Research, Behavior and Ethics. We invest in companies with a business-buyer's perspective. Founded in 2008, Triad is a 100% employee-owned SEC registered investment adviser. Learn more at www.triadim.com.

Triad has $136 million of assets under management as of September 30, 2014. The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 10.9% vs. 8.0% for the S&P 500 Index (April 30, 2008 to September 30, 2014).

When I was a kid I did various jobs to make a little money -- newspaper delivery (yes way back then kids delivered papers on bicycles, with no helmets!) -- mowing lawns, washing cars, you name it, I did it.

When I graduated to teenager status, I assisted in the painting of a few homes. I'd had some experience earlier in my child labor career helping to paint the inside and outside of our home. So I was a mildly seasoned vet when I moved on to painting complete stranger's homes. Painting was kind of fun since I didn't do it 40 hours a week all year long. And I was pretty decent with a brush and roller. Although on one job I did knock over a paint can in a backyard and spilled paint all over the patio floor. It was a beautiful flagstone floor. A beautiful, not properly covered floor. Then I came along. What a mess. It took hours to clean up. The homeowners were sympathetic to my adolescent shortcomings. However, my house painting career ended shortly after that at the tender age of fifteen.

I'm reminded of my teenage painting adventures when I describe our investing process. Investing at times can be similar to watching paint dry. Pretty boring, although occasional fireworks can happen. Business values of good companies tend to grow over time but that doesn't mean that their stock prices always react right away.

Good investing habits require the ability to endure long periods where nothing much seems to happen. About as exciting as, you guessed it...watching paint dry. But sometimes it's the right approach. Too much activity can be counterproductive. Just ask day traders. Every new investment idea comes with new risks that can trip you up, whereas staying put means you're only dealing with the risks you already know, and presumably understand, better.

I should note there's a difference between a more restrained pace of trading and activity that tends to help investors make good decisions. The investors we admire the most work hard studying businesses and the people running them. But they are perfectly willing to be patient with their investment as part-owners of a well-run business.

One thing we try to remember is that more trading brings with it more new risks for us to understand. If we make 10 new investments in a given year and each one has 3 major risk factors, that's a total of 30 new risks we have to understand. If instead we make 3 new investments, we have dramatically reduced the number of new risks that can cause us trouble. Granted this is a simplistic example, but the more we jump around the more trouble that we can potentially encounter. So it might be better to sit still, and watch the paint dry. You lessen the chance that your extra movement will cause you to "knock over the paint can" and create new, unforeseen investment headaches.

-John Heldman, CFA

Past performance does not guarantee future results.

Results are presented net of fees and include the reinvestment of all income.